President Obama’s willingness to reduce cost of living increases for Social Security and other benefit programs as part of a comprehensive deficit-reduction plan has excited Republicans and moderate Democrats, but has liberal Democrats and seniors’ groups gnashing their teeth.
Talk of adjusting the Labor Department’s consumer price index to more accurately measure real inflation in the economy has become a bargaining chip in a renewed effort by the White House and key members of Congress to negotiate a “grand bargain” of spending cuts, entitlement reform and additional tax revenue to bring down the deficit.
Known as chained CPI, this alternative formula reflects how consumers change their purchasing habits when prices rise or fall for a broad range of services, including food, housing, clothing and medical expenses. The Congressional Budget Office estimated that government spending on Social Security, Medicare and other benefits would decline by about $216 billion over the ten years if this less generous index were in place.
White House Press Secretary Jay Carney said recently that Obama would consider chained CPI “as part of a big deal, part of a comprehensive package that reduces our deficit and achieves that $4 trillion goal [of spending cuts] that was set out by so many people in and outside of government a number of years ago.”
But officials of AARP, the largest seniors’ advocacy group, and liberal economists and activists warned on Monday that reducing the cost of living adjustment – even by as little as a third of percentage point – over time would have a highly detrimental impact on the economic well-being of older and disabled Americans and their families who receive benefits from Social Security.
“Small reductions to the annual COLA will accumulate over time so that the largest reductions in benefits will be on the oldest beneficiaries and the long-term disabled,” according to Gary Koenig, the economic security director at AARP’s Public Policy Institute. “For example, 92-year-old beneficiaries who were on the program for 30 years would see an 8.4 percent cut in benefits. Disabled children could face even larger benefit cuts over their lifetime.”
Rebecca Vallas, a policy advocate for the Community Legal Services of Philadelphia, said that a switch to chained CPI would prove particularly onerous to the 8.8 million disabled workers who now receive Social Security Disability Insurance – many of whom live at or below the poverty level and are struggling to make ends meet. Tom Tarantino, chief policy officer for the Iraq and Afghanistan Veterans of America, said that a change in the CPI adjustment could affect Veterans Administration benefits to disabled veterans who put life and limb on the line for their country.
“If you are promoting a chained CPI, you are telling veterans that their service is not valuable,” he said. “We’ve come up with a lot of creative ways to cut veterans’ benefits, and because this is so complicated, they [policy makers] think no one will notice until it’s too late. This is outrageous.”
With the White House and congressional leaders bracing for a major battle this spring over long term budget policies geared to stabilizing the $16.6 trillion national debt, Republicans are pressing Obama to make major concessions on entitlement spending, including Social Security, Medicare and Medicaid, that are the long term drivers of debt. While Obama and Democratic leaders are opposed to major overhauls of those federal benefit programs, they are willing to talk about ways to work around the edges to slow the growth of those programs, including changing the cost of living formula.
The current CPI is an inflation measure calculated by the government and used by almost every federal retirement, disability and income-support program to pay annual cost-of-living adjustments or COLA. The Department of Labor calls CPI “the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” The formula tracks the price change of basic goods and services across 200 categories, including food, housing, clothing and medical expenses.
Based on the CPI, dozens of tax elements – from the standard deduction, to limits on contributions to 401K plans, to the earned income and child tax credits – are adjusted annually.
This is where the lower CPI adjustment, known as chained CPI, comes in. The government’s standard CPI inflation-adjustment formula does not account for consumer behavior. But by assuming that people switch to cheaper alternatives when the price of some goods rises significantly – such as buying chicken, seafood or pork instead of beef, as one example – chained CPI reduces inflation adjustments. Only chained CPI accounts for people adjusting their purchases in response to price changes. As a result, chained CPI grows about .3 percent slower than the current rate.
The switch would generate significant new revenue by slowing the rate at which income thresholds for tax brackets rise. Over time, that would move taxpayers into higher tax brackets faster than they would have gotten there under the current formula.
A few of the chief arguments against a chained CP include the following::
-- It is a significant benefit cut that compounds over time, hitting late old-age beneficiaries and the long-time disabled hardest. For a worker with average earnings retiring at age 65 in 2015, chained CPI would cut benefits $653 a year (3.7 percent) at age 75, $1,139 a year (6.5 percent) at age 85 and $1,611 a year (9.2 percent) at age 95.
-- It cuts benefits for veterans. At least 771,000 veterans receive both Social Security and VA disability benefits. Under chained CPI, both would be cut. However, it is not clear whether veterans would be impacted by any change in the CPI formula ultimately emerging from the White House.
-- It cuts benefits for the indigent elderly and disabled on Supplemental Security Income (SSI) and Social Security Disability Insurance (SSDI). Nearly all SSI beneficiaries live below the federal poverty line while a quarter of SSDI beneficiaries live below the poverty levels.
-- It is less accurate for seniors and people with disabilities. Chained CPI assumes people can substitute cheaper products as prices go up, but this is not true of seniors and people with disabilities for whom health care makes up a larger share of expenses. In 2009, health care made up 12.9 percent of expenses for people 65 or older, but only 5.3 percent of spending for people ages 25-64.
Critics argue that before the administration and Congress jump to the conclusion that chained CPI is a more accurate cost of living measurement, the Bureau of Labor Statistics would have to do considerably more research on the topic. Although economic theory provides a strong foundation for recognizing the importance of substitution in people’s wellbeing, they say, very little research has actually examined whether this substitution varies by age or income.
“If our concern is accuracy, if we’re saying we want an index that follows the cost of living of seniors, we could do that by constructing a full elderly index – it could be a chained elderly index – but we don’t have the information we need to say that now,” said Dean Baker, co-director of the Center for Economic Policy and Research. “We know that a chained CPI is a cut – that’s indisputable. It will give lower benefits than what’s in the current law. Whether it’s more accurate or not, we don’t have the information to answer that question.”